Friday, April 10, 2009

Housing Slump Begins to Hit Manhattan & the Hamptons

One nice thing about a roaring stock market is I can post economic stories without feeling guilty of "piling on". As we wrote Wednesday [Apr 8: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces. Housing Bubble 2.0? (Not)]

In places where home prices have dropped to reasonable levels - we are finally starting to see a pick up in units sold. [Mar 28, 2009: Some Real Estate Markets Warming Up] Unfortunately, a great many people in the country still live in concentrated urban areas where housing is still too expensive for average Joe. [Sep 26, 2008 : 15% of Americans Spend 50%+ of Income for House Payments]

And as I've been writing in multiple pieces for the past year+, this housing bust is unlike any before because it is coming in two parts - the first part has been the "ridiculous mortgage" phase which is atypical - it has been LEADING us into the recession. Completely out of whack with history. Now we will enter the second phase which is the more typical housing bust in that is a LAGGING phase in a recession.

For newer readers, we've been stating that the typical recession is not caused by housing - usually it's caused by excess inventories, slackening demand, cyclical peak, too high interest rates - all the normal stuff. In those type of recessions, housing falters "late" in the cycle. But by forestalling "normal" recessions for 25 years through easy money printing as a solution (sound familiar?) we built up a massive excess of cyclical forces; and to top it off we blew a housing bubble as the cherry on top. Of course as should be apparent to you - the solution to causing home prices to go where they should never go through easy money and low mortgage rates is... well.... a return to easy money and low mortgage rates. This is now the only solution we know - and this time around it's institutionalized behavior by government. (I suppose one could argue it was before as well but now its explicit v implicit) And just as we did in middle part of the decade we are celebrating the solution.... because the fall out is to be worried about "another year". For now we buy stocks and talk about white knights of government "fixing it". It will be very interesting to watch what happens to the housing market when we cease from a false 4.75% mortgage rate and go back to "normal" 6%s. But that's a story for another day....

For today, we want to talk about those markets that thus far have held up. As we enter the next stage we should see the normal drops that come once the recession begins to bare it's teeth. The ones that come from job losses - the more typical foreclosures. If I could short one thing, New York City real estate would probably be a great one - it has mostly held up 'til now. I believe that changes and they join the crowd over the next 24 months. NYC will be an especially special sort of bust due to the fact that prices were subsidized by all the free money handed out by the credit boom. (and yes of course 4.7% or lower mortgages, taxpayer subsidizations to to the tune of 2% mortgages or 40 yr mortgages under the Obama plan, and all the other nice things FHA, Fannie, and Freddie are cooking up will offset this to some degree - if you steal enough money from future generations you can do some "good" today)

The first signs, via New York Times
  • While sales have picked up a bit in some suffering housing markets in the West, creating a glimmer of hope that home prices nationwide may be approaching a bottom, the Manhattan real estate market has just begun a steep slide. It parallels the decline in New York’s financial services industry, and housing analysts say it may continue long after other markets heal.
  • Apartment prices have once more become the talk of the town in Manhattan, but this time the talk is of uncertainty and falling numbers. While brokers say they are seeing more activity lately, especially from first-time buyers taking advantage of lower interest rates, housing analysts are predicting a prolonged slump in prices and sales that could last as long as four or five years.
  • In this year’s first quarter, sales of co-ops and condominiums in Manhattan plunged nearly 60 percent from the first quarter of 2008. Average co-op prices fell as much as 24 percent in the same period, according to various market reports released last week.
  • Condo prices have held up so far, but only because buyers who went into contract long before the downturn were closing on newly completed condominium buildings. But now few new contracts are being signed on unfinished condominiums, and some buyers have been renegotiating contracts or are trying to back out of them. Co-ops and condos make up 98 percent of the residential properties for sale in Manhattan.
  • The stress is most severe at the high end of the market. There are 350 apartments and town houses for sale in Manhattan with asking prices of more than $10 million, and inventory has been growing. It would take about six years at the current sales rate to absorb all those listings.
  • Manhattan was spared some of the housing problems the rest of the country faced during this downturn. The mortgage foreclosure rate in Manhattan remains low even today. While thousands of condos were built here, most were bought by homeowners, not speculators, as was common in Miami and other oversaturated markets. But Manhattan housing prices were driven higher by record earnings and bonuses on Wall Street, and they fell hard when the music stopped last fall.
  • The quick fall in prices is shown in the experience of Abigail Disney, a philanthropist and documentary filmmaker, who a year ago put her sprawling 17-room co-op on West End Avenue on the market for $13.5 million. After a series of price cuts, Ms. Disney has finally found buyers for the property, for just under $7.5 million, a 46 percent discount from her initial asking price. But to make a deal she agreed to restore the walls and convert it back into two apartments and sell it to two buyers.
  • Jonathan J. Miller, an appraiser who prepares quarterly reports on Manhattan, said the market could continue to fall through this year and next, especially if credit remained tight for most buyers. After that, he said, it could take several more years to work through the excess inventory.
  • The housing recovery will also depend on the state of the economy, which many forecasters say will take a disproportionate toll on New York City before the recession ends. In New York, the financial industry accounts for more than 30 percent of all wages, and at least some of the wages of half of all very high income households, according to the New York City comptroller’s office. While employment fell nationwide last year, the number of jobs actually grew in New York City until September. Since then, the city lost nearly 85,000 jobs through January, and the comptroller’s office has forecast a loss of 121,000 jobs in 2009 and another 83,000 in 2010.
  • In the late 1980s, a surge in condominium construction in New York created a glut of condo apartments. Prices peaked in 1989, declined steeply in 1991, bottomed out in 1993 and stabilized in 1995 and 1996. (so 6-7 years... as I stated in my piece Wednesday - which is typical for a regional bust)
  • Shaun Osher, the chief executive of Core Group Marketing, said he had begun to see more activity this spring, but at much lower prices, with luxury apartment prices off as much as 40 percent.
What will be apparent in 2 years is that a stabilization in housing will be very different than a V-shaped rebound. I do believe people buying anything outside of a foreclosure right now or in markets where prices are already down 50%+ are akin to those rushing into NASDAQ stocks in 2001 after "unheard of drops" and "rock bottom prices". And housing is far less liquid than Cisco Systems.

Let's circle over to the Hamptons shall we? Via Bloomberg
  • Home sales in the Hamptons, the New York oceanside communities favored by financiers and celebrities, plunged 67 percent in the first quarter from a year earlier as Wall Street job cuts and investment losses stifled demand for second homes.
  • Across 11 eastern Long Island towns, 96 homes sold in the three months ended March 31, marking the biggest percentage drop in at least 27 years, property broker Town & Country Real Estate said. It was the biggest percentage drop in their records, which date to 1982. In the same quarter of 2008, 287 homes sold.
  • “We are a luxury item, and people don’t want to spend money,” said Judi Desiderio, president of Town & Country. “I don’t think anybody was thinking about buying a second home if they’re watching the stock market fall off a cliff.”
  • The median sales price fell 28 percent from the year earlier to $698,461, Town & Country said. The decline was largely due to fewer sales of $5 million or more. The total value of all real estate sold in the Hamptons in the first quarter fell 78 percent to $140.2 million.
  • In East Hampton Village sales fell 81 percent, also to three houses. The total value of all homes sold there was $4.1 million, a 95 percent decline. “Those are your iron-clad, been-there-for-over-a-hundred- years, been-used-by-the-Kennedys areas,” said Desiderio. “It’s the blue-chip, best-of-the-best. I would never expect that.”
Thankfully there are green shoots sprouting all over the rest of the United States - weed-like. Everywhere. A good thing, because I don't think we can count on New York for a while. Brown shoots for a while.

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